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By Ellen Brown ScheerPost
On January 30, when former Federal Reserve board member Kevin Warsh was nominated by President Trump as the central bank’s next chair, markets sold off and gold and silver plunged. Investors were positioned for a “dove,” someone inclined to cut rates aggressively and keep money loose; and Warsh has a long-standing reputation as a “hawk.”
So wrote Michael Nicoletos in an article titled “Everyone Is Focusing on the Wrong Thing.” But Nicoletos and some other commentators are seeing something else on the horizon – a rebalancing of the banking system through an overhaul of the Federal Reserve itself. In recent months, noted Nicoletos, Warsh has argued that the central bank’s “bloated balance sheet” has made borrowing “too easy” for Wall Street, while leaving “credit on Main Street too tight.” That contrast — abundant liquidity for the largest financial institutions, scarcity for the communities that actually generate economic activity — is a structural flaw that has unbalanced the American economy.
Nicoletos explained:
For the better part of fifteen years, the dominant approach to economic management went something like this: the Fed buys massive amounts of Treasuries and mortgage-backed securities (Quantitative Easing), flooding the financial system with reserves. This pushes asset prices higher: stocks, bonds, and real estate. The people who own those assets feel wealthier. Through this “wealth effect,” they spend more. And since roughly 70% of U.S. GDP is consumption, the economy grows.
As a result
The top 10% of Americans, who own the vast majority of financial assets, did exceptionally well. The other 90%, the average worker, the small business owner, the person trying to buy their first home, were largely left behind.
Nicoletos called the Warsh nomination a regime-change story, a shift in how policymakers think about growth, inflation, and the Fed’s role in markets. Warsh has spent years at the Hoover Institution arguing that the Fed’s balance sheet is bloated and that Quantitative Easing distorted markets. He has described QE-driven growth as a temporary “sugar high,” and he has called for “regime change” at the Fed. Rather than controlling inflation through QE and higher interest rates, he argues, it should be focused on increasing supply through local productivity.
Nicoletos observes that Treasury Secretary Scott Bessent, too, has been arguing that the economy needs to shift away from Wall Street-driven liquidity to Main Street-driven credit. Bessent says the era of the Fed being the primary engine of financial markets should end. Stephen Miran, a Governor at the Federal Reserve, has also been speaking publicly for lower rates, a smaller Fed footprint, and faster growth.
The new approach, says Nicoletos, represents a fundamental shift in policy. “Instead of relying on the Fed’s balance sheet to inject liquidity from the top down, the idea is to use the banking system to channel credit from the bottom up.”
Echoes from the Treasury
In remarks before the Federal Community Bank Conference on Oct. 9, 2025, Treasury Sec. Bessent said, “Since 2010, we’ve lost 3,600 community banks. That’s not sustainable.” He emphasized the collapse of new bank formation since 2008, the regulatory tilt toward megabanks, the need to restore local lending ecosystems, and a goal of “Parallel Prosperity” — Wall Street and Main Street rising together. He affirmed, “No longer will regulation serve to entrench big banks and empower Washington bureaucrats to the detriment of community banks and the clients they serve.”
How would this rebalancing be carried out? In a letter in The Wall Street Journal by Bessent and Sen. Bill Hagerty titled “How to Make Main Street Banks Great Again,” the co-authors observed:
The biggest banks benefit from a perceived government guarantee that smaller institutions lack.
This perceived guarantee has contributed to the steady disappearance of community banks. The U.S. has lost 3,600 of them since 2010, a 45% decline. Community banks’ share of bank assets has fallen to 15% from 23%. Their share of outstanding loans has dropped to 20% from 27%. …
Despite holding only 15% of industry assets and deposits, community banks account for 40% of small-business loans and 70% of agricultural loans.
Empowering them to succeed is essential to driving economic growth in America’s heartland.
… Dodd-Frank was supposed to end “too big to fail” but instead created “too small to succeed.” It’s time for regulators and Congress to reckon with the damage that the act has inflicted on community banks and the families that depend on them. To expand opportunity for all Americans, the banks that serve Main Street must have the same chance to succeed as the banks that serve Wall Street.
The proposed solution of Bessent and Hagerty is legislation involving “targeted expansion of deposit insurance” to include non-interest-bearing deposits over the current limit:
This would put community banks on a more even playing field with their larger competitors, and provide small businesses more certainty to maintain their payroll and other operating accounts with community banks in times of stress. By bolstering depositor confidence and reducing the risk of runs, the policy would prevent costly failures before they happen.
How About Some “Mini-Feds” for the States?
FDIC insurance coverage for business payroll is no doubt a good idea, but to really level the playing field, community banks need more. They lack the access to liquidity and the “implicit guarantee” of the biggest banks, which remain “too big to fail.” A more comprehensive approach would be for states to establish their own “mini-Feds” as backstops for local bank liquidity and capitalization. For a model of how this can be done and how well it works, we have a 106-year-old example in North Dakota.
The state-owned Bank of North Dakota (BND) has actually been called a mini-Fed for the state’s local banks. North Dakota has maintained a stable, locally-rooted banking ecosystem while the rest of the country consolidated, and it has more community banks per capita than any other state. The BND provides correspondent banking services to virtually every financial institution in North Dakota. It provides secured and unsecured federal fund lines, check-clearing, cash management, and automated clearing house services for local banks. It participates in their loans and guarantees them. The banks are thus willing to take on more risk, and they have been able to keep loans on their books rather than selling them to investors to meet capital requirements. As a result, North Dakota banks were able to avoid the 2008-09 subprime and securitization debacles and the 2023 wave of bank bankruptcies.
By partnering with the BND, local banks can also take on local projects that might be too large for their own resources, projects that might otherwise go to out-of-state banks or remain unfunded. Due to this amicable partnership, the North Dakota Bankers’ Association endorses the BND as a partner rather than a competitor of the state’s private banks.
Unlike the Federal Reserve, which is not authorized to support state and local governments except in very limited circumstances, North Dakota’s “mini-Fed” can help directly with state government funding. Having a cheap and ready credit line with the state’s own bank reduces the need for wasteful rainy-day funds invested at minimal interest in out-of-state banks. The BND has also demonstrated the power of a state-owned bank to leverage state funds into new credit for disaster relief and other local needs.
The BND has had an average return on equity of close to 20% in this century. Truth in Accounting’s annual Financial State of the States report rated North Dakota #1 in fiscal health for 2025, with a budget surplus per taxpayer of $63,300. In 2024, North Dakota was rated by Forbes Magazine the best state in which to start a business. The BND model is a win-win for local banks, the state government, ND taxpayers, and the state’s local communities.
Introducing Don Morgan, Public Banking’s New Champion
In the last 15 years, over 50 bills have been filed in states across the country for public banks like the Bank of North Dakota. But so far, none of those bills has passed. Why not? Opposition by big out-of-state banks was anticipated; but community bankers have also expressed concern, worried that the state bank will compete and take their business.
Don Morgan, who has been BND president for the past two years, has now put those concerns to rest. The BND has long kept a low profile, but Morgan represents a new generation, willing to take the show on the road. He says he loves talking about the Bank of North Dakota. In two recent in-person presentations — at Harvard Law School and before New Mexico legislators and bankers in Santa Fe — he has detailed the bank’s history, structure and successes. He stresses that the BND is forbidden by law to compete with North Dakota’s private banks. Instead, it partners with them.
Morgan is an engaging speaker who is easy to understand, and his presentations have put legislators and community bankers at ease with the concepts. The recorded podcasts (linked above) are well worth a listen.
The Collateral Obstacle
Other hurdles for public bank advocates are chartering requirements that the BND did not face in 1919. These include FDIC deposit insurance and deposit collateralization of 100% or more – requirements that actually make no sense for a public bank whose deposits come from the local government that owns it.
Consider California, which has state tax revenues exceeding $62 billion (down from $92 billion a year ago). These funds must be deposited somewhere. Under current law, any bank holding California public deposits must pledge 110% collateral in the form of Treasuries or agency securities to back them. The rule was designed to protect public money, but it has contributed to the same structural asymmetry noted by Warsh and Bessent.
Large Wall Street banks can meet collateral requirements easily. They “insure” their capital with interconnected derivatives backed by collateral that has been “rehypothecated” (pledged or re-used several times over). The Financial Stability Board in Basel has declared that practice to be risky, “[a]s demonstrated by the 2007-09 global financial crisis.” The five largest Wall Street depository banks hold $223 trillion in derivatives — a risk highlighted by the Bank for International Settlements as “huge, missing and growing.”
But the mega-banks are classified as “SIFIs” – Systemically Important Financial Institutions; and under the Dodd Frank Act of 2010, a SIFI that goes bankrupt will be recapitalized through “bail-ins,” meaning the banks are to “bail in” or confiscate capital from their creditors, including their “secured” and “collateralized” depositors. Under the Bankruptcy Act of 2005 and Uniform Commercial Code Secs. 8 and 9, derivative and repo claims have seniority over all others and could easily wipe out all of the capital of a SIFI, including the “collateralized” deposits of state and local governments. The details are complicated, but the threat is real and imminent. See David Rodgers Webb’s The Great Taking, and Chris Martenson’s series drilling down into the obscure legalese of the enabling legislation, concluding here.
Main Street banks do not have access to those pools of collateral or to the Fed’s implicit bailout guarantee. As a result, local government deposits tend to flow to the largest banks, while local banks are shut out of the liquidity they need. Main Street credit remains tight, the state’s own money leaves the state economy, and public bank advocates have trouble designing business plans that are cost-effective.
This is a technical constraint that can be fixed with sufficient political will. North Dakota solved it by backing the BND with the full faith and credit of the state. This makes sense, since the state owns the bank and has ultimate control over the use of its own deposits. The BND does not have or need FDIC insurance, which would cover only $250,000 of its billions in state deposits; and there is no fear of runs, because the state is required by law to keep its deposits in the bank, and in any case it would not run on itself.
Not just the Bank of North Dakota but North Dakota’s local banks are very safe, aided by the BND with liquidity, capitalization, regulation, loan guarantees, and other banker’s bank services. No local North Dakota banks have been in trouble during this century, but if they were to suffer a bank run, the BND would be there to help.
The National Infrastructure Bank: A Complementary Solution
Another form of public bank that can rebuild productive capacity is a national infrastructure bank of the sort that powers China’s massive development. Infrastructure – in transportation, energy, water systems, broadband and public facilities – is a foundational driver of productivity. A National Infrastructure Bank (NIB) bill, HR 5356, is currently pending in Congress that would create a $5 trillion infrastructure bank capitalized with existing Treasury bonds. The mechanism is explained here. It would finance infrastructure at low cost without raising taxes.
The NIB bill now has 55 sponsors in the House, but they are all from the Democratic side of the aisle. Perhaps the Warsh/Bessent push for increased productivity will inspire some Republicans to join.
The Path Forward
If productivity is the cure for inflation, then the United States needs a financial system built to support productive investment. That requires community banks, but the current structure works against them. The Bank of North Dakota shows that a public bank can strengthen local lenders, expand credit, and anchor a resilient state economy. A National Infrastructure Bank can do the same at the federal level.
Public banks — local and national — are not alternatives to the private sector. They are the missing infrastructure that makes the private sector work.
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